Wildfires And Home Fire Insurance: Coverage Considerations For High-risk Areas – As wildfires burn homes across California, the state is also grappling with a different kind of climate predicament: How to stop insurance companies from abandoning fire-prone areas, putting countless homeowners at risk.
Years of megafires have caused huge losses for insurance companies, a problem so bad that, last year, California temporarily banned insurers from canceling policies on about 800,000 homes in or near at-risk parts of the state. However, the ban is about to expire and cannot be renewed, and recent plans to address the problem have failed in clashes between insurers and consumer advocates.
Wildfires And Home Fire Insurance: Coverage Considerations For High-risk Areas
Insurers are widely expected to continue their retreat, which could potentially destroy the housing market if homes become uninsurable.
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“The market has largely collapsed” in those high-risk areas, said Graham Knaus, executive director of the California Association of State Counties, which has pushed state officials to address the problem. “It’s a very large geographic area of the state that is dealing with this.”
The insurance crisis makes California a test case for the financial dangers of climate change across the country, as wildfires, floods and other disasters create economic shocks far beyond the physical damage from the disasters themselves. Those changes have already begun to affect home prices, the mortgage industry and the bond market.
In California, wildfires over the past few weeks have made the problem even more urgent. The state has battled more than 875 fires since mid-August, which have burned nearly 1.5 million acres and destroyed more than 2,800 structures, according to Cal Fire, the state fire agency. As of Monday, nearly 40,000 people still cannot return to their homes.
Firefighters in Boulder Creek, Calif., last month. Many firefighters themselves live in areas prone to fires and affected by the insurance crisis.Credit… Marcio Jose Sanchez/Associated Press
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Around the world, climate change has made storms stronger and more frequent, increased the intensity of droughts and contributed to more extreme wildfires, and, as a result, many insurance companies say their premiums are now set too low to cover the growing losses. But raising premiums, which are often tightly regulated, can create headaches for officials. California and other states have the power to reject or reduce rate increases, and they often face pressure from voters to do so.
The result is a dilemma for the government. Either let rates rise, squeeze homeowners, or take the chance that more insurance companies will pull back from vulnerable areas, as many across the West have already done. Without insurance, banks won’t issue mortgages, making homes harder to buy or sell.
This challenge is particularly pronounced in California, where regulation leans toward consumer protection. The government prohibits insurance companies from setting rates based on what they expect in future claims. Insurers are allowed to set rates only based on past losses.
Regulators also prohibit insurers from bearing the cost of buying their own insurance, which they do to cushion unexpected large losses. As wildfires worsen, costs for insurers will also increase.
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Both rules are designed to control higher rates. But in an age of climate change, insurers say those rules have prevented them from tracking wildfire damage.
“From a homeowner’s point of view, this is scary,” said Char Miller, a professor of environmental analysis and history at Pomona College near Los Angeles. But for insurance companies, he said, not insuring high-risk homes reflects an obvious logic: “Why would I insure something I know will be destroyed?”
The problem has gotten so bad that the state’s insurance commissioner, Ricardo Lara, last December banned companies from dropping off people in or near ZIP codes hit by recent wildfires, calling the situation a “crisis.” The move, which covers at least 800,000 homes across the state, marks the first time his office has used that power.
The ban was never meant to be a permanent fix. It only lasts for 12 months and cannot be extended.
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Family members amid the remains of their home in Vacaville, Calif. Problems obtaining insurance can complicate reconstruction efforts.Credit… Josh Edelson/Agence France-Presse — Getty Images
And the data shows that insurers continue to drop customers. The number of households buying coverage from California’s high-risk insurance program, an inexpensive and convenient alternative for people who can’t get private coverage, has increased more than 50 percent between the start of 2019 and June 2020, to nearly 200,000 households.
The program, called the FAIR Plan, covers fewer types of damage than private insurance policies and policies cap at $3 million. But the plan is getting more expensive: It has asked the government for permission to raise its rate by 15.6 percent, after initially asking for an increase of more than double that amount.
This spring, state lawmakers introduced a bill they described as a compromise: In areas prone to wildfires, insurers would be allowed to include climate forecasts and other costs into their rate requests, in return for making protection more available and offering discounts to people who take steps to reduce their home’s vulnerability to bushfires.
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The bill aims to address the needs of homeowners in what experts call the “wild urban interface,” or W.U.I. — places on the edge of the forest, where the risk of forest fires tends to be highest but where housing costs are often lower than in urban areas.
“My main concern is the people in W.U.I., who are having a very difficult time getting insurance,” said State Sen. Susan Rubio, who represents southeast Los Angeles County and is one of the bill’s authors. “To do nothing is not an option.”
Insurers support the change, as do county associations. The same goes for the union that represents firefighters at Cal Fire, many of whom live in fire-prone areas.
“It affects our members, being able to get insurance for an area they can afford to live in,” said Tim Edwards, president of Cal Fire Local 2881, which represents more than 6,500 firefighters. He said more than 100 of his members have lost their homes due to forest fires over the past five years.
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Carmen Balber, executive director of an organization called Consumer Watchdog, called the bill “the insurance industry’s wish list.” He said the state should at least make insurance companies offer home insurance to anyone who takes steps to reduce their wildfire risk, such as clearing brush around their home.
“If insurers want to sell in the best parts of California,” Ms. Balber said, “they have to sell in the riskier parts.”
Usergroup succeeded. Last month, the Senate stripped most of the provisions from the bill, instead ordering the insurance commissioner to review current regulations and report back to the legislature within two years. Even the stripped-down measure failed to come up for a vote by the time the annual legislative session ended Monday night.
“It was effectively destroyed,” said Rex Frazier, president of the California Personal Insurance Federation, which represents insurers. “Even if half of California is on fire.”
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The state’s insurance commissioner said the focus now is working with high-risk communities to reduce their wildfire risk so insurers will continue to offer coverage without large rate increases. “I will continue to move quickly to address the cost and availability of wildfire insurance that affects our state,” Mr. Lara said. “If Californians are doing our part to protect homes from wildfires,” the industry should respond by agreeing to insure those homes, he said.
But reducing the human and economic toll of wildfires will require deeper reforms than simply changing building codes or promoting better landscaping, others say. It also may require addressing the lack of new housing in California cities, which has helped push development further into fire-risk areas, a trend that has continued despite years of severe wildfires.
David Shew, former chief of staff at Cal Fire, said that spreading homes into fire country used to seem like a reasonable trade-off. “There’s a huge need to build housing in more affordable areas, which kind of, by default, tend to be more vulnerable and fire-prone landscapes, because the land there is cheaper,” Mr Shew said. “There’s a sense that, well, it’s worth the risk.”
But when climate change makes wildfires more devastating, that logic seems less clear, he said. Short of tougher restrictions on building in high-risk areas, exacerbating the statewide housing crisis, there are physical and political limits to how much the government can do to reduce that risk, which means insurance will be more expensive.
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“We will never have enough fire engines to park in every driveway,” Mr Shew said. “It’s only going to get worse.”
An earlier version of this article misstated the size of the rate increase sought by California’s FAIR Plan managers. Although the initial request was for a 35 percent increase, it was later revised to 15.6 percent.
Christopher Flavelle focuses on how people, governments and industry are trying to deal with the effects of global warming. He received the 2018 National Newspaper Foundation award for coverage of the federal government’s struggle to deal with floods. More about Christopher Flavelle
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